Multinational groups of companies (“MGCs”), as defined in Russian law, will face new transfer pricing (“TP”) reporting obligations starting from 2018 in relation to their activities in 2017 (the first reporting period).This change results from a Federal Law* (the “Law”) whose provisions are, to a large extent, based on OECD principles.
The new obligations increase the amount of data on MGCs and their members that will be disclosed to the Russian tax authorities. This may increase the possibility and scope of TP control and corresponding additional tax accruals.
Overview of the three-tier system of TP documentation in Russia
Definition and scope
The three-tier system of TP documentation filing, according to the Law, is meant for Russian taxpayers who form part of an MGC.
An MGC, as defined by the Law, is a group of legal entities and/or foreign structures that are not recognised as legal entities, which are interrelated through participations in the charter capital and/or management control. A group qualifies as an MGC if it meets all of the following conditions simultaneously:
- it prepares consolidated financial statements in accordance with the accounting legislation or the requirements of any stock exchange applicable to listed companies;
it includes at least one Russian tax resident or a foreign company that is subject to taxation in Russia through a permanent establishment; and
it includes at least one company that is not recognised as a Russian tax resident or is subject to taxation outside Russia through a permanent establishment.
The new reporting obligations apply to MGCs that have total revenues in excess of RUB 50bn (approx. EUR 72.5m) in a financial year, unless other financial criteria are prescribed by the national legislation in the country of incorporation of their ultimate parent companies. If the ultimate parent company of an MGC is a foreign tax resident, the revenue threshold set by the legislation in the country of incorporation of the ultimate parent company applies instead.
The ultimate parent company is defined as a member of an MGC (i) which directly or indirectly participates in the charter capital of the other participants of the MGC or otherwise controls the other participants, and (ii) its participation share in the MGC is sufficient to include the financial statements of the other members of the MGC in its consolidated financial statements. The two elements of this definition are, in our view, contradictory. This is because exercising control over the other entities in forms other than through participation in charter capital normally does not lead to the obligation to include the financial statements of such “controlled entities” in consolidated financial accounting statements. So far, there is no court practice or other explanation on how to resolve this contradiction.
An authorised representative (the equivalent of Surrogate Parent Entity) is a member of an MGC that is appointed by the ultimate parent company as a unit responsible for filing a country report in the name of the MGC.
Types of reporting
Under the Law, the members of an MGC are obliged to file the following new types of TP reporting:
- notification of their participation in the charter capital of an MGC;
- country data, including:
- CbCR (Country-by-country report);
- global documentation (Master file); and
- national documentation (Local file).
Notification of participation in an MGC
A notification is filed by Russian taxpayers who are members of an MGC in a prescribed form and should contain information on all the taxpayers that are parts of the MGC. Please refer to the table at the link below for more information on this new type of reporting.
A CbCR filing is obligatory in Russia if the ultimate parent company of the MGC is a Russian tax resident, but may in certain cases be requested as well from all the other Russian taxpayers that are parts of the MGC.
The CbCR should reflect a large amount of financial and administrative information on each member of the MGC (both Russian and foreign tax residents). Please refer to the table at the link below for more information on this new type of reporting.
Global documentation may be requested by the Russian tax authorities from any Russian taxpayer who is a member of an MGC. There are no requirements as to the form of such documentation but it would include information on the structure of the group, its business activity and key transactions, etc. Please refer to the table at the link below for more information on this new type of reporting.
National documentation may be requested by the Russian tax authorities from any Russian taxpayer who is a member of an MGC that is participating in cross-border transactions with the other MGC members. There are no requirements as to the form of such documentation but it should contain certain additional data in comparison with the standard TP documentation filed by all the Russian taxpayers that have participated in controlled transactions since 2012. Please refer to the table at the link below for more information on this new type of reporting.
With the Law now in force, we would recommend that Russian taxpayers take the following steps:
- Make a preliminary assessment of whether the new requirements may apply to the group’s existing and planned controlled transactions.
- If such new requirements apply, start preparing the information that should be filed with or may be requested by the Russian tax authorities.
- Implement a data collection procedure with the group’s foreign entities and start collecting such information.
- Review the group’s existing TP documentation in light of the new requirements and make any necessary amendments to it.
* In Russian